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Electronic Investor

Have It Your Way

By

Theresa W. Carey

Updated Nov. 8, 2004 12:01 a.m. ET

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Edited by Randall W. Forsyth

SOME ONLINE BROKERS HAVE LET sophisticated traders choose where to route their equity orders for a couple of years. In recent months, however, some brokers also have begun to offer investors smart order routing for options -- as well as the ability to pick where they get executed.

Interest in routing options orders perked up when the Boston Options Exchange began providing the possibility of price improvement via its electronic-auction process known as PIP, or price-improvement period. The PIP guarantees the "must-be-filled side" improvement over the National Best Bid and Offer (NBBO) by at least one cent, with the possibility of putting the order into a competitive auction which may result in considerably more improvement. According to the Boston exchange, while there is no price-improvement guarantee for any particular order, the rate of improvement over its first three months of operation has averaged more than $2 per contract. There is a description of the price-improvement technology at its Website (www.bostonoptions.com).

Online brokers that have embraced options-order routing include ChoiceTrade, optionsXpress and Interactive Brokers. ChoiceTrade (www.choicetrade.com) has three ways of trading: ChoiceTrader Online, which is Web-based, and two direct-access products, one of which runs from within eSignal (ChoiceTrader Select). The other direct-access offering, ChoiceTrader Select Pro, is powered by BonTrade.

ChoiceTrader Online recently added smart options-order routing to all U.S. options-market centers. Customers submitting marketable option orders will have them sent to the Boston Options Exchange when it is at the best prevailing price, or NBBO, and there is availability of an NBBO improvement order on the opposite side of the trade, in which case the order will be exposed to a price-improvement auction.

ChoiceTrader Online users can select a particular market for orders through a drop-down list on the options order-entry screen. Smart order routing and the ability to direct an options order will be made available on the direct-access platforms in the next six weeks. ChoiceTrade commissions are 99 cents a contract for options orders ($2.97 minimum). Equity orders are $5 per trade when made via ChoiceTrader Online; users of the direct-access platforms pay one cent per share, with a $3 minimum.

The firm demands the NBBO on every executed trade, and will reimburse your commission should they fail to get it. Certain orders are not eligible for NBBO treatment, including stop orders, combination orders of any kind, limit orders not entered at the current bid or asked, orders during "fast markets" and orders placed at any exchange which designates that it is temporarily not eligible for NBBO treatment. Commissions are $1.50 per contract with a $14.95 minimum.

David Kalt, president of optionsXpress, says that though his firm offers option- order routing, some exchanges that might be showing a better price have trading bottlenecks that delay execution. Kalt says, "We've sort of discouraged our customers from routing their own orders, since we're guaranteeing them the execution at NBBO. Self-routing adds one more level of complexity to an order that we didn't think was necessary." OptionsXpress has offered options order routing since January 2002.

Interactive Brokers (www.interactivebrokers.com) has built the ability to route options orders into its direct access application, Traders Workstation. Orders routed to the Boston Options Exchange may participate in its price-improvement auction in pennies.

Interactive Brokers offers nine different price-improvement orders, composed of one of three different order types (Limit, Relative and Pegged to Stock), and one of three auction strategies (Transparent, Discretionary-Improving and Discretionary-Matching). The order type determines the price of your order and the auction strategy determines how a price improvement is applied. Should an auction start, your improvement amount will be the absolute difference of your order price in pennies and your rounded listed price.

Interactive Brokers' customers who submit Smart marketable options orders will have their orders routed to the Boston Options Exchange when it is at the NBBO and Interactive Brokers has information that there is an NBBO improvement order on the opposite side of the trade. In that case, your order will be exposed to a price-improvement auction.

IB's smart order router will look for the best price for each leg of a complex order, regardless of where the best price might be obtained. Most brokers send the entire order to a single marketplace where the best price may not be available for each leg of the order, or declare that multi-leg orders are not eligible for a best price guarantee.

Entering these price-improvement orders into the Trader Workstation is a little tricky, however. First, the trader must direct auction orders to BOX, then make a series of choices from up to seven fields: Order Type, Limit Price, Price Aux, Auction Strategy, Delta, Stock Reference Price, and Stock Range (High & Low). Options commissions are $1.00 per contract if you choose smart routing, and $1.95 per contract for directed routing.

What's New at Online Brokers

Fidelity (www.fidelity.com) recently rolled out its Income Management Account, which is designed to help you manage your retirement finances. Using an account consolidator, the IMA helps you get a holistic view of your retirement finances including Fidelity and non-Fidelity assets, and lets you track all your income and expenses in one place.

To get started, an investor looking toward retirement goes through the Retirement Income Planner, which collects information on anticipated retirement expenses, current assets, and investing habits. The planner will let you know whether you're likely to have what you need when you retire, or whether you need to adjust your investing habits now.

At retirement, the IMA will monitor how your actual activity compares to your Retirement Income Plan, to help you ensure that your money doesn't expire before you do. Most of these features have been available in other guises on the Fidelity site; the IMA pulls them all together.

The Income Management Account includes alerts that warn you, among other things, when your asset allocation has gone off track, or when your cash balances are running low. You can also set up alerts for such things as quarterly tax payments or deposits from your Fidelity income sources. There are no additional fees for making use of the IMA.

ESignal, from Interactive Data, recently released version 7.7 of its streaming, real-time market data, news and analytics platform (www.esignal.com). Among the enhancements are data from three Latin American exchanges -- the Mexico Stock Exchange, the Bolsa de Mercadorias & Futuros (Brazil) and the Sao Paulo Stock Exchange. More than 110 exchanges now are available via eSignal. Another new feature is an enhanced Symbol Lookup, which lets user search by company name, and also by exchange or instrument type when they have little information about the issue.

Wall Street Access sold its retail customer list to E*Trade at the end of October after making the "strategic decision" to focus on the institutional side of the business.

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